A private real estate advisor has been fined by the Securities and Exchange Commission for allegedly failing to comply with its limited partnership agreement during a transaction between two of its funds.
Paramount Group agreed to pay $250,000 in relation to claims it failed to reimburse its Fund III with agreed costs after it sold a San Francisco parking garage to the another of the firm’s funds, the Residential Development Fund.
The SEC said Fund III’s investment advisory committee agreed in 2013 to the sale on the condition RDF would reimburse Fund III for the money it had already spent on getting the garage rezoned for a proposed residential tower.
But after receiving independent valuations that pegged the sale price over $64 million, the advisor decided not to have RDF reimburse Fund III.
“In the respondent’s view, the final price RDF paid to Fund III already reflected the increased value that would result from upzoning, and related expenses, because one of the two appraisals ultimately used to calculate the purchase price effectively assumed the upzoning would be achieved,” the SEC said.
The SEC said that this decision was not disclosed to Fund III’s advisory committee or limited partners. It added that the advisor had fiduciary duties to both funds in the transaction but there was a conflict of interest because the advisor owned a much larger stake in RDF than in Fund III.
“[The] respondent could not effectively consent on behalf of Fund III or the Fund III limited partners to eliminate the reimbursement requirement upon which the Fund III advisory committee expressly conditioned its approval of the sale of the garage,” the SEC said.
Fund III’s LPs were reimbursed in August 2015 by another fund for the $4.5 million in development expenses. These remedial acts, and the advisor’s co-operation, factored into the agency’s decision to accept a settlement, the SEC said.
Paramount agreed to the settlement without either confirming or denying the charges.